CalSTRS has the cash to pounce on opportunities in coronavirus-fueled dislocation: CIO

Chris Ailman also said the pension fund would be more interested in "collaborative structures" than traditional partnerships.

California State Teachers’ Retirement System‘s private equity pacing this year will be driven by “opportunity set and pricing,” Chief Investment Officer Christopher Ailman told Buyouts in an email Thursday, with no major changes due to the ongoing coronavirus pandemic rocking global markets.

“We will stick with our current plan, despite the total fund shrinking from the equity market decline,” Ailman wrote.

The pension recently adopted a long-term plan to significantly up its private equity allocation, as Buyouts reported. However, that plan has no clear timeline, but will instead develop as opportunities warrant.

“CalSTRS has learned from experience that setting a rigid timeline is inefficient as investment opportunities ebb and flow and do not follow a calendar time frame,” staff said in a document presented to its board in January. “If investment opportunities present themselves then staff will move quicker…if a steady allocation is more prudent, such as the allocation to private equity, where time diversification is critical, then an opportunity-based approach is more appropriate.”

Ailman said CalSTRS will be vigilant about opportunities going forward.

“In the past, we have found that after a crisis the opportunities are generally more attractive,” Ailman wrote. “We have held cash to be able to take advantage of these types of opportunities.”

Ailman told Buyouts the pension has created a “common team” among all its private asset classes to present opportunities, which it also did in 2009.

Earlier this week, Ailman told Bloomberg TV that the oil and gas and restaurant and hospitality sectors were some of the hardest hit, but in his email to Buyouts he stipulated that anything and everything was on the table.

“Liquidity is important and we will make all opportunities compete for that capital,” Ailman wrote. “We will look at all opportunities equally.”

Ailman also told Bloomberg CalSTRS is considering shifting some of its allocations to opportunistic credit and distressed debt amid the coronavirus crisis.

“In 2008, it was a financial crisis due to over-leveraging and borrowing. This is a health crisis,” he told Buyouts. “This time, the global economy has completely stopped, but is also prepared with a huge amount of stimulus to restart.”

Ailman also told Buyouts that CalSTRS wants to “balance” distressed debt with equity ownership investments.

“We will be less interested in traditional partnership structures and more interested in collaborative structures,” he wrote.

CalSTRS significantly hiked its co-investment activity in the second half of 2019, as Buyouts reported. Its goal is to eventually double it, as Buyouts reported.

Not many capital calls

Ailman said on Bloomberg TV that while “cash is king” right now in private equity, the pension system has not been flooded with capital calls.

“They’ve mostly drawn on—and told their portfolio companies to draw on—their lines of credit [and] we think that is a smart thing to do to maintain liquidity,” Ailman said.

Ailman also said he felt it would be a couple months before the losses in the public markets will be felt in private portfolios.

“We will see some declines, but those won’t really show up in portfolios until probably out in June, just because of the lag that private equity has in its valuation process,” he said.

As of February 29, before most of the drop in public markets, CalSTRS’s full fund was valued at just over $243 billion, according to its website.

Action Item: Watch Ailman’s whole interview on Bloomberg TV here.